Controversy on Discounting Greenhouse Gas Emissions

On March 13, Sens. Tom Harkin (D-Iowa) and Charles Grassley (R-Iowa) along with 10 others sent a new letter to EPA Administrator Lisa Jackson urging “EPA to refrain from including any calculations of the ILUC components in determining life-cycle GHG emissions for biofuels at this time.” The new letter referenced a letter sent in November to then-Administrator Stephen Johnson, which was signed by four of the current 12 signers as well as then Sen. (now Interior Secretary) Ken Salazar.

The latest letter argues that quantification of indirect land use change is difficult because there are many factors that affect it. Current models do not take into account the many causes of land use change or their overlapping effects. California’s recently proposed rule on the life cycle accounting shows how difficult it can be. While California’s Air Resources Board staff use modeling that relies on an assumption that use of land to grow crops for biofuels will push agricultural production to other countries and that this effect can be estimated through use of a general equilibrium market model, they acknowledge that the prediction is inconsistent with actual trade data.

The Senators wisely say,

It is possible that future domestic and international climate change policies will include major provisions restricting land use changes. Indeed, that may be the most appropriate and effective way to reduce GHG emissions associated with land use changes.”

The group also raises the issue of the use of a discount rate in the analysis of the reductions of greenhouse gases attributed to both biofuels and gasoline. (See earlier post on discounting.)

Michael J. Roberts, and Agricultural Resource Economist at North Carolina State University, makes a case for setting the discount rate at zero:

I have no idea how much we should spend reducing GHG emissions because I have no idea how costly reductions would be, the costs should warming occur, or how GHG affects all the possibilities. But I think a low discount rate, in the ballpark of zero, should be used when weighing current expenditures to future expected benefits.”

So how costly might reducing GHG emissions through use of advanced biofuels be? Sandia National Laboratories’ 90 Billion Gallon Biofuel Deployment Study suggests that the infrastructure costs of developing a large-scale advanced biofuels industry are essentially equivalent to those of drilling for more oil in U.S. onshore locations such as ANWR and the Rockies.

Use of a discount rate of any sort in the EPA rule seems highly inappropriate. It is well-noted that the choice of a discount rate can greatly affect the outcome of a cost-benefit comparison. But consider that the Renewable Fuel Standard requires biofuels to achieve a percentage reduction in greenhouse gas emissions compared to a gasoline baseline. The use of a discount rate on both biofuels and the gasoline baseline arbitrarily closes the gap between the two, understating both the costs of gasoline and the benefits of biofuels.

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Discounting the Future of Biofuels

It appears that global leaders’ faith in energy technologies that can reduce greenhouse gas emissions compared to oil is waning, particularly for biofuels, as reported in GreenInc. Respondents to the survey, which included 1,000 environmental experts, ranked energy conservation and efficiency technologies as having the greatest potential impact, both short- and long-term.

Some 44 percent of respondents also said they expect that the current economic crisis will hinder progress toward an effective international climate agreement. Katherine Sierra, World Bank Vice President for Sustainable Development, noted, “The development challenge is to accelerate or maintain robust economic growth in poorer countries while also dealing with the impacts of climate change. The financial situation is no justification for postponing action on climate change. Climate change is not waiting, so we cannot wait either.”

These sentiments appear to be relevant to a rather arcane debate about the application of a discount rate to greenhouse gas reductions. The debate over the discount rate may become a more prominent issue, since it is a feature of the EPA’s Advanced Notice of Proposed Rulemaking on Regulating Greenhouse Gas Emissions under the Clean Air Act. It also appears that the EPA would apply a discount rate to greenhouse gas emission reductions in the life cycle assessments of biofuels, under the RFS.

A discount rate is used in cost-benefit analyses as a way to measure current costs against the value of future benefits. In applying the theory to reductions in greenhouse gas emissions, the idea is that the benefits are for future generations and on a worldwide scale, while the costs of deploying reduction technologies are paid by specific individuals today. Further, there is uncertainty about which technologies will provide the greatest benefit and investing in one may come at the expense of investing in others.

Gary Becker, the noted economist and University Professor at the University of Chicago, explains it by saying,

Future generations would be better off if the present generation, instead of investing the $800 billion in greenhouse gas-reducing technologies, invested the same amount in capital that would be available to future generations.
“Common sense also dictates that one recognizes that technologies will be much improved in the future, including technologies related to improving health, income, and the environment. A positive and non-negligible discount rate is the formal way to recognize the importance of these and related considerations.”

But environmentalists have traditionally opposed the use of a discount rate for environmental benefits. Lisa Heinzerling, a law professor at Georgetown University, responded to the use of the discount rate in EPA’s ANPR on her own blog page, saying, “Discounting is a technique used to reflect the idea that events occurring in the future are not as important as events occurring now. By using a fairly low discount rate, EPA avoided the severe trivialization of the future that often attends use of discounting.”

Elsewhere, though, she took issue with the use of any discount rate for environmental benefits:

We have said that the federal government places too low a value on human life; that it devalues the future through discounting; that it fixates on the costs and dismisses the benefits of environmental protection; that it slights the worth of effects that cannot be counted.
“Cost-benefit analysis is a deeply flawed device that has never been the environmentalist’s friend. It impedes rather than aids understanding of the concrete consequences of regulations. It would behoove the next president — and all who value environmental protection — to do more than fiddle around the margins of old debates, and to question whether a decision-making framework that can stare environmental catastrophe in the face and declare it ‘efficient’ is really the best we can do.”

Even proponents of including international land use change calculations in the EPA’s life cycle assessment of biofuels may take issue with the application of a discount rate to the calculation, or at least a high rate. Mark Delucchi is a research scientist at the Institute of Transportation Studies at UC Davis and developer of the Lifecycle Emissions Model. He notes that in the context of indirect land use for biofuels, “the discount rate determines the value of the reversal of the initial change: a zero discount rate gives it a value equal to that of the initial change; a high discount rate gives it no value.” And, “If the discount rate is very large, then we don’t care at all about the future reversion of land use and reversal of the initial change in emissions; we care only about initial change in land use and emissions.” In other words, using the discount rate in this context assumes that the carbon debt attributed to biofuels due to land use change is never paid back, which would be incorrect. Delucchi argues that a positive discount rate applied to the life cycle analysis should be reduced to reach zero over time.

However the debate on discount rate plays out in policies on greenhouse gas reductions and the Renewable Fuel Standard, the theory does seem to reflect the preferences of environmental leaders – that we not use biofuels today but wait for a better technology to come along in the future. The risk for them is that everyone’s faith in the ability to produce clean energy and reduce greenhouse gas emissions will start to fall.